A $300,000 loan carries a 5% annual fixed rate. Approximately how much simple interest accrues in the first month before considering the payment?
Correct Answer
B) $1,250
Why this is correct: Simple interest for a period is calculated as: Principal Balance * Annual Interest Rate / Number of periods in a year. Here, the principal is $300,000, the annual rate is 5% (or 0.05 as a decimal), and there are 12 months in a year. The calculation is: $300,000 * 0.05 = $15,000 of annual interest. To find the first month's interest: $15,000 / 12 = $1,250. Why the other choices are wrong: The choice "$1,000" is incorrect; it might result from using 6% instead of 5% ($300,000 * 0.06 / 12 = $1,500) or a different miscalculation. The choice "$1,500" is incorrect; it is the result of using a 6% rate ($300,000 * 0.06 / 12) or forgetting to divide by 12 ($300,000 * 0.05 = $15,000). The choice "$15,000" is incorrect; this is the approximate annual interest, not the monthly amount. Exam tip: For quick monthly interest estimation, remember "1% of the loan amount per month" is a 12% annual rate. For a 5% rate, it's roughly 5/12 of a percent of the balance.
Why This Is the Correct Answer
Why this is correct: Simple interest for a period is calculated as: Principal Balance * Annual Interest Rate / Number of periods in a year. Here, the principal is $300,000, the annual rate is 5% (or 0.05 as a decimal), and there are 12 months in a year. The calculation is: $300,000 * 0.05 = $15,000 of annual interest. To find the first month's interest: $15,000 / 12 = $1,250. Why the other choices are wrong: The choice "$1,000" is incorrect; it might result from using 6% instead of 5% ($300,000 * 0.06 / 12 = $1,500) or a different miscalculation. The choice "$1,500" is incorrect; it is the result of using a 6% rate ($300,000 * 0.06 / 12) or forgetting to divide by 12 ($300,000 * 0.05 = $15,000). The choice "$15,000" is incorrect; this is the approximate annual interest, not the monthly amount. Exam tip: For quick monthly interest estimation, remember "1% of the loan amount per month" is a 12% annual rate. For a 5% rate, it's roughly 5/12 of a percent of the balance.
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